Jimlur re IDCC executives:
I would like to elaborate and expound upon your post. This post is rather lengthy and not for the faint-of-heart, who do not like to hear anything “negative”.
Directors and top management officials of companies have a fiduciary responsibility to their shareholders, employees, and customers. Fiduciary responsibility means that insiders should deny their own self-interests for the interests of others to whom you have a fiduciary responsibility. Many in corporate management seem to have forgotten their fiduciary responsibilities to their shareholders. Outside shareholders’ interests should be placed before the self-interests of the insider shareholders, period. Unreasonable compensation, excessive stock options, and now significant discretionary insider selling all fit here.
In the following recap, four numbers are given for each of the five highest paid IDCC executives based on the latest 2002 proxy: (a) current salary, (b) 2001 bonus, (c) total salary plus bonus, and (d) 2001 granted options:
Goldberg $388,500; $276,834; $665,334; 70,000 options
Briancon $260,000; $125,000; $385,000; 81,250 options
Lemmo $244,500; $102,841; $347,341; 50,000 options
Merritt $262,500; $125,000; $387,500; 125,000 options
Tilden $249,000; $109,480; $358,480; 80,000 options
According to IDCC's latest 10K, the value of each option granted in 2001, using the Black-Scholes option pricing model, was estimated at $8.16 per share. If you multiply the number of options granted to each executive in 2001 times $8.16 value per option in 2001, and then add that back to the total current salary plus bonus, you should get the total estimated compensation of each executive. Doing the additional indicated calculations, I get the following estimated total executive compensation, including the value of the stock option grants, as follows:
Goldberg $1,236,534
Briancon $1,048,000
Lemmo $755,341
Merritt $1,407,500
Tilden $1,011,280
Mr.Fagan, CFO is not in the above list. In 1999 Mr. Fagan had the same salary and bonus as Mr. Merritt. However, Merritt got promoted to President of ITC and his salary is now more than Fagan's. I would guess that Fagan's current salary and bonus is between $300,000 to $320,000 and his granted options are approximately 50,000 per year based upon actual data from 1999. Therefore I estimate Mr. Fagan total compensation including the value of the stock option grants to be about $720,000.
Admittedly I do not really know what each executive does and therefore can’t really evaluate and judge the fairness of their pay. However, I would like to say why I perceive some of the executives pay at IDCC as being overly generous IMO. The case in point for my illustration is Mr. Rich Fagan, CFO. I feel that I can evaluate the reasonableness of his salary a little better than others, because I am a CPA with a Masters in Accounting. I have years of experience as a corporate controller and in public accounting with one of the big six CPA firms. I have just chosen to teach, because that is what I enjoy doing most.
Mr Fagan makes about $720,000 per year in salary, bonuses, and stock option grant value. Usually higher-paid CFOs deal with the large, highly complex businesses. Manufacturing and merchandising businesses are much more complex accounting-wise, than are service businesses. IDCC does not have complex manufacturing operations or merchandise inventories either. Neither does IDCC own extensive fixed assets that increase accounting complexities. IDCC does very little billing and invoicing, and has to keep up with only 25 licensees/customers rather than thousands upon thousands of customers. Therefore IDCC has minimal receivables to oversee with the resulting extensive collection efforts needed by most companies. IDCC has virtually no debt, so debt management is not an issue for the IDCC CFO. About the only accounting issues at IDCC are payroll, employee expense reports/reimbursements, and SEC financial reports/filings. It appears to me as though Mr. Fagan is being paid an awful lot of money for a relatively simple accounting job, all things considered.
The job performances of certain executives at IDCC are difficult to analyze due to lack of knowledge about specific job duties. Rip Tilden's position as COO comes immediately to mind. I'm not sure if anyone outside of IDCC is quite sure exactly what Rip's job now entails. We do know that it now excludes individual shareholder contact and relations. The press release announcing Rip's promotion stated the following:
"As Executive Vice President and Chief Operating Officer, Mr. Tilden will be responsible for leading the Company's initiatives to achieve excellence in operating performance. He will manage and coordinate ongoing operations to create a competitive advantage for InterDigital to ensure high levels of performance, customer satisfaction and superior value creation."
I'm just not quite sure what IDCC's operations are? IDCC does not have manufacturing operations or merchandising operations that most COOs would be in charge of. IDCC has licensing operations and engineering operations. However, Mr. Merritt is in charge of the licensing subsidiary, and Dr. Briancon is the Chief Technology Officer in charge of the engineering operations. What types of operations are left for Rip to oversee?
Rip used to oversee communications and public relations. Many shareholders think that IDCC's past communication and public relations efforts produced minimal results. Mr. Tilden is an excellent speaker, and I thought he might be in charge of public communications. However, Rip no longer participates in even the quarterly Conference Calls. Why doesn't IDCC use its best public speaker, Mr. Tilden, to at least participate in the public Conference Calls any longer?
If Mr. Campagna is as actually involved in the operations of IDCC to the extent that I am led to believe he is, then he appears to be like a de-facto operating executive of IDCC. I am sure that there was several reasons for firing ex-CEO Mr. Gercenstein in short order. However, one of the main reasons could have been that Mr. Gercenstein opposed some of Mr. Campagna's decisions and was not totally "loyal" to Harry. Mr. Goldberg was not initially viewed as a permanent CEO type, and was originally placed in that position only temporarily. It seems strange to me that only after Mr. Gercenstein was hired and then fired, was Mr. Goldberg suddenly viewed as permanent CEO material.
From the latest proxy material as follows:
..."Prior to 2001, we engaged a compensation consultant who analyzed salary and stock-based compensation alternatives and provided recommendations to the Compensation Committee regarding executive salary levels as well as other elements of compensation. This analysis assisted us in setting a baseline from which 2001 increases were made."
I have heard that IDCC’s officer compensation might be based upon a study of Qualcomm and other prominent wireless companies, but I certainly don’t know if this true or not. However, we should not base our compensation on what the large-cap companies are doing, because we are a small-cap company. IDCC’s salaries and compensation should be based upon comparable-size companies in the technology sector. We don’t have the revenues or earnings to match-up our executive pay to that of much larger companies. How many companies were included in the above analysis? How many of these included companies were small-cap technology companies with market caps under $1 billion like IDCC?
An individual owner tried to analyze IDCC’s compensation compared to other small-cap technology companies. Based on his findings, IDCC’s average base salaries and bonuses for the top executives are significantly above the other 17 similar sized technology companies, even though their average revenues were twice that of IDCC’s. He did not try to value the stock option grants into the compensation figures, but noted that most of these companies do have stock options also. However, I would bet these other companies' option grants are not nearly as generous as IDCC’s option grants. Therefore, I bet if the value of option grants could have been somehow factored into the comparable companies’ data, IDCC’s compensation would have blown-away these other small-tech companies’ executive compensations.
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=116119
As of Dec. 31, 2001, IDCC had 54.4 million common shares outstanding. On the same date, IDCC had 10.6m stock options outstanding at a weighted average exercise price of $11.19 per share, and 1.4m warrants outstanding at a weighted average exercise price of $5.51 per share, for a total of 12 million outstanding options/warrants. This equals 22% of the total outstanding shares. In 2001 alone IDCC granted over 5 million stock options, which tremendously exceeds normal percentages for virtually all companies. I do not know of another company that granted stock options of almost 10% of the common shares in just one year. This excessive granting of stock options last year was certainly not based upon any increase in the market price of IDCC stock during 2001.
IDCC also granted over 2.5m stock options in 2000. From a shareholder perspective, there was virtually nothing good accomplished in the year 2000 that justified large option grants. Only one license, and that with Ubinetics, was executed during the entire year. The stock price tanked from $82 to $5. CEO Gercenstein was hired after a very long search, and then was quickly fired within six months. I do not understand how IDCC could justify issuing 2.5m in stock options in 2000 for that miserable year.
According to IDCC's latest 10K, the value of each option granted in 2001, using the Black-Scholes option pricing model, was estimated at $8.16 per share. Therefore IDCC's total option grant in 2001 was valued at over $40 million. Many are now advocating that options should be expensed. Therefore, the value of the options granted in 2001 by IDCC would equate to another 55% of expenses on top of the $73m of recorded expenses in 2001, if options were to be expensed.
The affect of shareholder dilution by stock options is a matter of great concern. Stock options cost the outside shareholders tremendously by reducing the future market price of the stock. Outstanding shares get increased and earnings per share get decreased/diluted when these options are exercised. Most all of the current options are now in the money. The low average exercise price combined with the substantial length of time for these options, probably means that virtually all these outstanding options/warrants will ultimately be exercised. The outstanding options and warrants of 12m combined with 2.5m already exercised in the last three years is an earnings dilution of 28% based on 52m outstanding shares before the 2.5m exercised options. This dilution % does not even include any option grants for 2002. If the future market price of IDCC stock could have gone to $50 per share before dilution, then the 28% dilution factor would subtract $14 from the indicated amount and drop the stock price to only $36.
This dilutive affect of stock options is something that all shareholders need to know about as it will negatively impact the long-term stock price. The exercise of stock options is also the triggering mechanism behind most all of the ongoing insider selling. I don't think that anyone can argue that insider selling is positive for the short-term price of the stock. I think that all shareholders could agree that insider selling is a negative factor upon the short-term stock price, but we might disagree on whether insider selling is just slightly negative or significantly negative. I think everyone needs to be aware of the true costs and negative impact of options.
The recent flood of discretionary insider selling activity at IDCC beginning in the middle of November is another of my concerns. The psychological impacts that all of these ongoing individual SEC form 4s are having upon the stockholders is unnerving to say the least. With almost every officer discretionally selling stock as the critical events rapidly approach, is definitely sending a bad signal to the investment community as to management’s perceived ability to resolve these critical events in a favorable manner. Already we did not get the type of decision and updated contract that many of us had hoped for in the Samsung arbitration.
A recap of these insider sales based on the SEC form 4, which trigger an investment alert on each sale, beginning in the middle of November as follows:
Filing Shares Shares Total Percentage
Date Insider Sold Remaining Shares Sold
11/20 Colson 11,000 27,275 38,275 29%
11/20 Briancon 10,000 4,788 14,788 68%
11/21 Kiernan 6,000 38,745 44,745 13%
11/27 Goldberg 12,800 45,485 58,285 22%
12/02 Fagan 11,820 24,379 36,199 33%
12/02 Merritt 8,091 26,262 34,353 24%
12/04 Bolgiano 28,260 126,476 154,736 18%
12/12 Kiernan 37,500 38,745 76,245 49%
1/06 Lemmo 10,000 26,480 36,480 27%
1/08 Miller 10,689 3,201 13,890 77%
The Total Shares owned before the sale is calculated by adding the number of Shares Sold to the actual Shares Remaining after the sale according to the form 4. The Percentage Sold is then calculated by dividing the shares sold by the total shares owned before the sale. I know that the form 4 does not factor in the shares that can be obtained in the future through exercising option grants, but total option grants are not shown anywhere on the SEC form 4. Also 10b5-1 planned sales are not indicated on the form 4. I believe that the only 10b5-1 planned sales in the above were from Bolgiano due to his exercising on expiring options. However, all the rest of the above sales are discretionary and are not preplanned.
My main point is that IDCC's insiders need to be more aware and cognizant of the possible negative impact of these insider sales to the investment community. I thought IDCC did a very good job and took a proactive stance with the press release in October, when the vesting of restricted stock gave rise to significant insider sales due to tax-related reasons. You even stated that this particular selling in October was a part of the 10b5-1 planned sales. I commended Guy Hicks on that press release and how the situation was handled.
It appears that IDCC insiders definitely consider stock options as part of their compensation, and will exercise stock options, and will continue to sell stock each year to enhance their standard of living. Therefore, what I would like to suggest is for IDCC to establish a 10b5-1 planned sale for each year, and eliminate discretionary insider selling. The only exceptions to the discretionary insider selling policy should be for a very limited number of clearly defined situations. Possible exceptions might include an unexpected hardship in an insider’s personal financial situation, or any stock acquired by the insider at the prevailing market price with no additional/special rights thereon.
Unless one of the specific exceptions occurs, allow the insiders to sell only once a year at a predetermined time, such as a few specific days in December, through a 10b5-1 planned sale. This predetermined date could be changed each year. If it is part of a 10b5-1 planned sale, then insiders are allowed to sale no matter if you have material undisclosed information or not. A press release could accompany this once-a-year planned 10b5-1 sale to help explain the insider selling to the investment community. If insider selling is part of a planned sale, then much of the negative implications are greatly minimized.
Some of the benefits of using 10b5-1 Trading Plans are as follows:
· “Boosting employee morale by providing a measure of liquidity with respect to stock compensation;
· Reducing the risk that employees may violate the insider trading laws;
· Minimizing the possibility of adverse publicity resulting from transactions in company securities by executives that are not pursuant to Trading Plans; and
· Reducing the risk of shareholder lawsuits, which frequently rely on unusual sales by senior executives to demonstrate… claims of market manipulation.”
It also appears that the director compensation at IDCC is very high. Some information exploring the compensation of IDCC's Board of Directors is linked as follows:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=105729
An article on compensation committees and executive pay as follows:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=117893
Excerpts from the referenced article:
..."When America's biggest companies decide how much to pay their top executives, most of them leave the decision to a group of their board members known as the compensation committee. In theory, members of this committee are independent enough of the company's executives to deny them a raise or force them to take a pay cut when the company is faring poorly."
..."The study by the New York Times of 2,000 of the largest American corporations, measured by their stock-market value, shows that 420 of them, more than 20 percent, had compensation committees in 2001 with members who had business ties or other relationships with the chief executive or the company that could compromise independence. Dozens of those members were company executives."
..."At more than 70 companies, even the chairman of the compensation committee had such ties, and in nine cases, the chairman actually was an executive of the company."
One of my major areas of shareholder concern dealt with governance issues at IDCC. Are there proper checks and balances with true accountability in place at IDCC, or is too much power and control concentrated in one person? It is the understanding of many that Mr. Campagna is very involved in the affairs and decisions at IDCC. Because of Mr. Campagna’s weekly and sometimes daily involvement in the affairs at IDCC, he can not properly be considered as a true independent “outside” director.
If Mr. Campagna is not really an independent outside director, then I think he should resign from the compensation committee and be replaced by two more truly independent outside directors. This would help assure that there is not even the slightest appearance of a possible conflict of interest. This suggestion would bring the total to three independent outside directors on this extremely important committee.
It appears as though continued employment, promotions, and pay at IDCC could all be connected to ongoing loyalty to Mr. Campagna. He has the appearance of being in a position to possibly buy loyalty from both the executives and the other directors of IDCC because of his role on the compensation committee. This current situation at IDCC just does not look or smell right, even if there are no actual improprieties whatsoever. Harry may be totally above reproach, but there just appears to be too much concentration of power at IDCC without properly functioning checks and balances.
InterDigital is certainly not alone, as many corporate officials seem to have forgotten about fiduciary responsibility to the shareholders during the great stock market decade of the 90’s. It is not just the Enrons, Worldcoms, Tycos, etc. but many, many other companies as well. I believe that the time is ripe for shareholders to be more vocal about getting their company’s to return whole-heartedly and quickly to their fiduciary responsibilities. If corporate insiders appear to be doing things that are not in my best interests, then I have a right and I believe a duty to voice my concerns. And that’s what I am doing.
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